Co-op blames 'economic environment' for collapse of Lloyds deal

The Co-op blamed the UK's weak economy for the collapse of its deal with Lloyds this morning, which would have given it more than 600 additional bank branches.

Co-operative Legal Services (CLS) announced yesterday that it was using 23 bank branches to offer a greatly expanded family legal aid service. If the Lloyds deal had gone ahead, it would have had over 1,000 bank branches by 2015.

In a statement, the Co-op said its group and bank boards had decided that "it was not in the best interests of the group's members to proceed further at this time".

The decision reflected "the impact of the current economic environment, the worsened outlook for economic growth and the increasing regulatory requirements on the financial services sector in general."

Peter Marks, chief executive of the Co-operative Group (pictured), said: "Having worked closely and constructively with Lloyds we are naturally disappointed to have reached this conclusion."

Marks said the deal, known as the 'Verde' transaction, "would not currently deliver a suitable return for our members within a reasonable timeframe and with an acceptable level of risk".

He went on: "The Verde transaction offered a significant opportunity to The Co-operative and the sector as a whole as it would have created a major challenger bank.

"It was right therefore, for us to explore it in the detailed way we have. We were, however, clear from the outset that Verde was a complex transaction and that this was not the only option open to us to develop our bank.

"We remain committed to driving the Co-operative Group forwards under our clear strategy and, as part of that, we will continue to develop our bank for the long-term, offering a real alternative on the high street with our strong, established brand and our reputation as a trusted financial services business."

The Co-operative Group reported a loss of 599m last month. CLS said its annual revenue rose by nearly 13 per cent last year, taking it to 33m, but its profit for the year was only £26,000.

It is understood that this reflected the set-up costs of the family law service, launched last November.